The FanDuel and DraftKings Gambling Controversy, Explained

Even if you don't play fantasy sports, chances are you know what they are by association with that one guy you know WHO NEVER STOPS TALKING ABOUT HIS TEAM. Likewise, even if you have no idea what they do, you've probably heard of the companies FanDuel and DraftKings, because THEY WON'T STOP AIRING COMMERCIALS ON TV. You know, the ones where the dude looks really nervous, and then really happy, and then they're holding a check with six zeroes, and you think, Oh, so that's why they're so happy, and then the dude holding a check is saying that you—yes, YOU!—can also be a millionaire if you'd just log on and play? And you're thinking, I don't know, dude, that sounds waaaay too easy? Yeah, those ones. Well, now both of those companies are mired in scandal.

A little background: fantasy sports have been popular for a time now. The more traditional model you find on ESPN or Yahoo! works like this: you draft a team full of players at the beginning of the season and how well those players perform in the real world dictates how well you do in the fake world that is your fantasy league. In recent years, a new model, popularized by aforementioned FanDuel and DraftKings has quickly ballooned into a billion-dollar industry. Instead of being stuck for an entire season with the original team you drafted, you are given a budget and a list of players who are each assigned a market value, and using your budget, you pick a new team every time you play. Then, you pay anywhere from 25 cents to 1,000 dollars in real money, join a pool of other players, and depending on its size, win a moderate sum of money or a shit ton of money—or, and this is the much more likely scenario, lose your money ("But the commercial made it look so easy!!").

Wait, but isn't gambling illegal? Gambling is illegal. Strategy games, however, are not. Back in 2006, it was deemed that fantasy sports were not a game of chance, but a game of skill, and was therefore allowed to continue existing. Yes, to anyone with a brain, that's a bunch of bullshit, but it's a loophole, and what is the American Dream if not exploiting loopholes for racks on racks on racks of cold, hard cash? (Whattup, Mitt!) So FanDuel and DraftKings were free to make money, and make it did they. Via The New York Times: "Eilers Research, which studies the industry, estimates that daily games will generate around $2.6 billion in entry fees this year and grow 41 percent annually, reaching $14.4 billion in 2020."

But, then, this happened: Ethan Haskell, a DraftKings employee, accidentally released a bunch of data about player usage, detailing which players were most picked. Not long after, he proceeded to win $350,000 in a FanDuel contest. Whoa, that's a weird coincidence. Yes, yes it is. And maybe that's all it was: a coincidence. DraftKings has said that Ethan did not have access to that data, until after his team was already locked in for the week.

The other scenario, however, looks a lot more like "insider trading". DraftKings employees cannot participate in contests on DraftKings, but they can participate in FanDuel contests (just as FanDuel can compete in DraftKings, but not FanDuel). Per the finance brainiacs at CBS MoneyWatch:

In daily fantasy sports, as in the stock market, the most widely chosen assets—or, in this case, athletes—represent a less attractive investment because the rewards of the performance are shared among many holders. By contrast, the solitary owner of an undervalued asset would reap larger rewards than those who have opted for a more obvious choice.

For Haskell, that could've entailed using data from DraftKings to help him determine which players were "owned" by the most competitors on FanDuel, said Michael Lopez, an assistant professor of mathematics at Skidmore University, tells CBS MoneyWatch.

Then, by selecting lesser-owned players with big upside. (Instead of picking Tom Brady, take Andy Dalton—Who?! Exactly.) Now, granted, that still takes some significant insight, and a lot of risk. But use data people outside the company don't have, and you have a massive competitive advantage.

Which is probably why the New York Attorney General, the Department of Justice, and the FBI are all formally inquiring into the goings-on of two companies that are already in boiling hot water, since they've basically been gambling rings ("game of chance") hiding behind the "game of skill" label. If the alleged charges are true—and they may not be—and the employees are using data to screw tens of thousands of participants out of money, then at least those commercials weren't lying. It's not so hard to be a millionaire. So long as you have the right data.